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TMI Blog2011 (3) TMI 1754X X X X Extracts X X X X X X X X Extracts X X X X ..... t appreciating that these amounts represented gross value of assets which were withdrawn from the assets schedule and do not represent the actual realization of scrap value which was realized during the year was ₹ 5.6 crores only which included misc. receipt and taken into account to arrive at gross receipt; (2) the CIT erred in not considering the utilization of depreciation reserve at ₹ 21.43 crores adopted by the assessee without appreciating the fact that ₹ 34.92 crores represented loan repayment during the year and, hence, the amount withdrawn from depreciation reserve remains at ₹ 21.34 crores; & (3) the CIT erred in not allowing the deprecation claim on motor buses at 40%. II. ITA NO: 735/10 - AY 2006-07: 3. Likewise, for this AY too, the assessee had raised nine grounds, out of which, ground Nos.1, 8 and 9 being general, they do not survive for adjudication. The remaining grounds are reproduced, in a concise manner, as under: (1) the CIT erred in including ₹ 60.4 crores in the gross receipt without appreciating that these amounts represented gross value of assets which were withdrawn from the assets schedule and do not represent the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment orders passed u/s 143(3) of the Act were erroneous and prejudicial to the interest of revenue. 6.2. The reasons set-out by the CIT for the issuance of notice u/s 263 of the Act are summarized as under: A.Y 2005-06: (i) At para 19 of the Notes to the Balance Sheet and P & L a/c, it was stated that the actual utilization of depreciation reserve during the year 2004-05 towards capital loans as per the finalized accounts was ₹ 34.92 crores, whereas the AO had taken the same at ₹ 21.43 crores from Schedule VI of the said report. The addition to gross receipt on account of actual utilization of depreciation reserve was to be considered at ₹ 34.92 crores instead of ₹ 21.43 crores and, thus, gross receipts being understated by ₹ 13.57 crores; (ii) in the depreciation statement, it was noticed that the assessee had received ₹ 21.34 crores towards sale of scrap which was not included in the assessment order while working out the quantum of gross receipt; (iii) the assessee had claimed depreciation on motor buses at 40% which has been allowed by the AO. However, the assessee's nature of business was 'public transport service' as men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the audit report) of the accounting policies, it is mentioned that income from sale of scrap is derived only when the material/scraped buses are lifted by the bidders, but this policy in my considered view, is clearly in contravention to the provisions of law u/s 145A of the Act w.e.f. 1.4.1999 which prohibits adoption of hybrid/mixed system of accounting. Be that as it may, the fact remains that the auditors in the depreciation schedule annexed as annexure-I (forming part of the report u/s 44AB) have clearly certified that scrap sold was to the tune of ₹ 21,58,61,170 and not ₹ 5.60 crores as now contended and, hence, admittedly since the assessee is following the mercantile system of accounting, the impugned amount of ₹ 21,58,61,170, in my considered opinion, on the basis of the facts available on record, was required to be considered for the purpose of quantifying the gross receipt and non-consideration of the same for the purpose of quantifying the same has thus resulted in the assessment order so passed being erroneous and prejudicial to the interest of revenue. (iii) Claim of higher rate of depreciation: "(on page 8)………The relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment was delivered in the context of double deduction claimed by the assessee both u/s 35 and s.32 of the Income-tax Act, 1961 which has been held to be untenable by the Hon'ble Court, yet the Court has clearly observed herein that there is a basic legislative scheme unspoken but clearly underlying the Act that two allowances cannot be and are not intended to be granted in respect of the same asset or expenditure. In the instant case, the assessee was allowed 100% deduction in respect of investment on vehicles as application of funds and, hence, the claim of depreciation allowance on the same in respect of the very same asset for being considered towards application of funds for working out the surplus, in my opinion, tantamount to a double deduction keeping in view the ratio of the judgment of the Hon'ble Apex Court in the case referred to earlier. The fact of the matter is that the cost of the assets were allowed to be deduced 100% as application against the surplus of the appellant in the earlier year and also in the relevant year. This being so, there is no cost available for allowance of depreciation and this is what the Hon'ble Apex Court has observed by holding that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sheet and P & L account, the assessee had received grants from CRF and MLA to the tune of ₹ 1.64 crores out of which ₹ 1.03 crores was utilized and the balance of ₹ 61 lakhs was required to be added to the gross receipt; & (v) exemption u/s 11(1)(a) of the Act at 15% of the gross receipts instead of net figure was allowed. 6.5. Brushing aside the assessee's rebuttal and its explanation as recorded in his impugned order under dispute, the Ld. CIT had reasoned thus - (i) Actual utilization of depreciation reserve: "(On Page 5)………….Hence, para No.23 of the 'Notes to Accounts' read with the relevant resolutions extracted above thus leads to the inevitable conclusion that the actual utilization of depreciation reserve during the relevant accounting year toward repayment of capital loan was to the tune of ₹ 38.49 crores and not ₹ 9.35 crores as adopted by the AO for the purpose of quantifying the gross receipt, thus resulting in the gross receipt being prima facie under-adopted to the tune of ₹ 13.57 crores approximately and, therefore, resulting in the assessment order so passed being erroneous and prejudicial." ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting, the amount of ₹ 60.4 crores on the basis of the facts available on record, was required to be considered for the purpose of quantifying the gross receipt and nonconsideration of the same for the purpose of quantifying the same has thus resulted in the assessment order so passed being erroneous and prejudicial. The AO, however, in the assessment order had made addition of ₹ 60.4 crores to the gross receipt towards sale of assets which was accepted by the assessee and the same was not appealed to. If the amount added by the AO was akin to the amount of ₹ 60.4 crores as being towards sale of scraps as discussed earlier, the assessment order so passed in respect of this issue not being erroneous and prejudicial. However, the AO shall verify the same and act in accordance with law. (iii) Double deduction on account of allowance of claim of depreciation on vehicles: (On page 9)I have carefully considered the submissions put forth as above. With profound respect to the judgment of the Hon'ble jurisdictional High Court and the other decisions cited, in my considered opinion, the ratio of the decision of the Hon'ble Apex Court in the case referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to corroborate that the amount had been included in the Misc. receipt, more so when the break up of misc. receipt annexed to written submission, the amount does not stand reflected and, thus, the non-utilization of ₹ 61 lakhs out of the said grant was required to be considered by the AO for quantifying the gross receipt; & (v) Exemption u/s 11(1)(a) @ 15% on gross receipt instead of net amount: The 'income' contemplated u/s 11 is the real income and not the income as assessed or assessable. If the accounts of the fund are properly maintained according to the principles of accountancy, the accumulation shall be up-to the specified percent (specified in the Statue) of the net income as per accounts. This was the ratio of the judgments in the cases of - (i) CIT v. Estate of Shri V.L.Ethiraj 136 ITR 12 (Mad) (ii) CIT v. Nizam's supplemental Religious Endowment Trust 127 ITR 378 (AP) (iii) CIT v. Rao Bahadur Calavale Cunman Chetty Charities 135 ITR 485 (Mad) (iv) CIT v. Ganga Charity Trust Fund 162 ITR 612 (Guj) The ratio of the judgments was to the effect that income for the purpose of s.11 does not refer to 'total income' as defined under the Act but refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. - that the assumption of the CIT was that the loans were repaid to the extent of ₹ 34.92 crores out of depreciation reserve; that Item No.19 of the Director's report at page 15 of the annual statements could have induced the CIT to presume that loans were repaid out of depreciation reserve. The director's report says - '19. The actual utilization of depreciation reserves during the year 2004-05 towards capital loans as per finalized accounts is to ₹ 34.92 crores.' - that the AO had rightly added ₹ 21.34 crores in the assessment, that the said amount was adjusted against the assets written off which had been more fully declared in schedule V and, thus, there was no error in the order of the AO; - without prejudice, reversal from depreciation reserve itself was not be considered for gross total income since it was not the income earned in the relevant year which was required to be applied. In the circumstances, even ₹ 21.34 crores added by the AO was not required to be assessed; - as regard repayment of loan, the same was shown in Schedule VII which was to the extent of ₹ 39.92 crores, out of which, ₹ 5 crores was by way of reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs: (i) correspondence with the first appellate authority; (ii) revised statements of computation for the AYs under dispute etc., 7.2. On the other hand, the Ld. D R had justified the stand taken by the Ld. CIT in invoking the provisions of s. 263 of the Act as the assessments concluded by the AO for the AYs under challenge were erroneous and prejudicial to the interest of the Revenue and, thus, he was within his realm for the detailed reasons set-out in his proceedings u/s 263 of the Act. The Ld. D R was vehement in his urge that the assessee should have no grievance to agitate the reasonableness of the CIT and, therefore, fervently pleaded that the orders of the Ld. CIT require to be sustained. 8. We have duly taken note of the submissions of the either side and also diligent in perusing the relevant records and the documentary evidence adduced by the Ld. AR during the hearing proceedings. 9. We venture to adjudicate the issues raised by the assessee in a chronological order as under: A.Y. 2005-06: Grounds (1) & (2) - Addition of ₹ 2.34 crores 10. It appears that both the ld. AO and ld. CIT have not understood the nature of entries passed in the books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scrapped). 5. Bank/Cash A/C Dr. xx To P&L A/C xx (being the value of scrap realized on sale of the condemned buses). 12. From the apparent scheme of entries as stated above followed by the assessee, it appears that both the ld. CIT in his order u/s. 263 of the Act and ld. AO u/s. 143(3) of the Act, have erred. The Ld. CIT's finding is that the notes to accounts leads to the inevitable conclusion that the actual utilization of depreciation reserve during the relevant accounting year towards repayment of capital loan was to the tune of ₹ 34.92 crores and not 21.34 crores as adopted by the ld. AO for the purpose of quantifying gross receipt, thus resulting in under-statement to the extent of ₹ 13.57 crores (34.92 - 21.34). While as the ld. AO in his order has stated that the assessee has utilized a sum of ₹ 21,34,78,417 out of depreciation reserve, which was available for it to acquire capital asset and therefore in order to reduce this sum from capital expenditure the same is added to the gross receipts in the hands of the assessee. 13. Both the above propositions seems to be absurd because the actual fact is that the above entries are book entries and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular cited, we find that the Circular had in fact dealt with the allowance of depreciation on motor vehicles owned and used by tour operators and travel agents in the business of running these vehicles on hire for tourists. It had also been further clarified that - "3. Further, under sub-item (2)(ii) of item III of Appendix I to the Incometax Rules, 1962, a higher rate of depreciation, namely 50%, is allowed on motor buses, motor lorries and motor taxis used in a business of running them on hire. Therefore, where a tour operator or travel agent uses such vehicles, owned by him, in providing transportation services to the tourists, higher rate of depreciation should be allowed on such vehicles. It is clarified that "motor vans" are akin to "motor lorries" or "motor buses" and, therefore, higher rate of depreciation will be allowed on motor vans also, if they are used for providing transport services to tourists. Since the assessee has not been using in a business of running motor buses on hire, we are of the firm view that the above mentioned Circular cannot come to its rescue. (ii) The Ld. A R, however, armed with the ruling of the Hon'ble Keral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividual, in another situation a group or at different situations it may be a marriage party. In our judgment, the situation would not make any difference. When vehicles in regard to which depreciation is claimed do not run otherwise than for hire, obviously, the situation would be governed by item E(1A) reproduced above. ……." We have also duly perused the ruling of the Hon'ble jurisdictional High Court in the case of Society of the sisters of St. Anne reported in 146 ITR 28 (Kar), on the strength of which the AO had allowed the depreciation as claimed by the assessee at 40%. Since the ruling of the Hon'ble High Court of Kerala cited supra is directly on the point, we are of the considered view that the assessee is entitled to claim depreciation at 40% on motor buses. It is ordered accordingly. A.Y. 2006-07: 17. Ground No. 1 & 2 for the assessment year is identical to the issue discussed in the immediately preceding A.Y., which has been remitted back to the file of ld. AO for fresh consideration. Therefore, our finding for the relevant A.Y. also holds good as that of the immediately preceding A.Y. Ground No.3 -Allowability of depreciation on motor buses: 18. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to be computed on commercial principles and not on gross receipts. The learned DR has rightly relied on the order of the Tribunal in the case of Gem & Jewellery Exports Promotion Council supra which in turn, followed the decision of the Hon'ble High Court of Madras in the case of CIT v. Rao Bahadur Calavala Cunnan chetty Charities 135 ITR 485. The words used in section 11(1)(a) is 'income' and not 'gross receipts'. The decision of the Hon'ble Supreme Court has only held that exemption u/s 11(1)(a) is to be computed not with reference to the income left after application but on income before application and nowhere it was held that exemption is to be computed with reference to gross receipt. Therefore, we hold that the assessing officer is justified in allowing 15% …………" (ii) In view of the above proposition, we are of the firm view that the assessing officer had rightly allowed the appropriate deduction for exemption. 22. Lastly, the assessee had come up with an additional ground for both the AYs under dispute wherein, it has been, inter alia, pleaded that the amount withdrawn from depreciation reserve was not to be included in the gross income o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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